A reader sent in the following question to me recently in
regards to sales taxes on online sales:

"I buy a lot of stuff on the internet for my business.
Recently I bought something in an online auction, and when the
seller sent me his invoice, he added my state's sales tax to my
winning bid. I thought this was odd, because the seller's
located in another state and I didn't think you had to charge
sales tax on interstate sales. Is there something going on here I
should know about?"

Generally, when you're selling stuff--online or
otherwise--you charge sales tax only when the buyer is located in
the same state as you. Under current law, which may be changing
soon (see below), you're not supposed to charge sales tax on
sales to buyers who live in other states.

There are two exceptions to this, however, and your seller
probably fell into one of them:

First, if the seller has an office, warehouse, distribution
facility or retail location in your state, the seller may have to
charge you sales tax because he is legally "doing
business" in your state. This is why, when you buy something
from a mail order catalogue, the invoice form sometimes says
"residents of States A, B and C, please add sales tax to the
total." The mail order company has its retail or warehouse
outlets in States A, B and C and is required to collect sales tax
from buyers located in each of those states, regardless of the
actual location your order is shipping from.

Second, a growing number of states are entering into
"compacts," or agreements, encouraging in-state sellers
to collect sales tax from buyers in neighboring states. New York and Connecticut have such an arrangement,
while eight Midwestern states have banded together to create the
Midwest Border Tax Compact. The idea is that by
charging your buyer state sales tax, you're helping the buyer
avoid liability for "use taxes" on stuff they buy from
out-of-state vendors. (In just about every state, the sales tax and
use tax are the same rates and are calculated the same way.) How
thoughtful of them!

If you live in a state that has a reciprocal sales tax agreement
with another state, you're required to collect the other
state's sales tax, pay it to your state's Department of
Revenue--with a special tax return form--and then hope and pray
they remit the tax to the other state government (of course they
will, won't they?).

So why haven't you heard about this before? Up until
recently, most states that have sales tax agreements with other
states haven't been too aggressive about enforcing them. Why,
you ask? Now, I'm not a politician, but I suspect it's hard
to convince voters their tax dollars should be spent to help
another state collect its tax revenue. There are also a few U.S.
Supreme Court rulings that prohibit states from imposing sales
taxes on interstate commerce, whether directly or indirectly, and
no state official wants to be accused of violating federal law.
But, as I mentioned above, the law may be changing soon.

Every few years, a bill is introduced in Congress, which would
permit states to levy taxes on sales made over the internet, among
other things. A majority of states have signed onto the Streamlined
Sales Tax Project or SSTP, which is basically a national
"reciprocal tax agreement," and are awaiting the
"green light" by Congress to put the SSTP into effect.
The bill, which was previously voted down, is being reintroduced in
Congress this fall and stands a better-than-average chance of
getting passed this time around.

If the SSTP passes Congress, then internet sellers of all
kinds--including people putting stuff up for sale on eBay and other
Internet auction sites--will have to charge state and local sales
taxes at the rates in effect wherever their buyers are located.
With more than 7,500 sales tax jurisdictions in the United States,
complying with the SSTP will impose a crippling paperwork burden on
many small e-businesses that can't afford to hire teams of
people or buy expensive software packages to help them comply.

A number of e-commerce companies and grassroots organizations
are lining up to fight the SSTP. For example, eBay's government
relations department has set up a special website
where you can sign up for e-mailings notifying you of the
bill's progress. You can also sign up to receive "form
letters" you can send by e-mail to your elected officials to
let them know the impact the SSTP will have on you.

Of course, your seller may simply have been mistaken in charging
you sales tax. Call him and find out. Also, if the stuff you bought
from him is inventory you're planning to resell, you
shouldn't be charged sales tax at all. So provide your seller
with a "resale certificate" and he'll almost
certainly back off.

Cliff Ennico is a syndicated columnist, author and host of
the PBS television series MoneyHunt. His latest book isSmall Business Survival Guide (Adams Media).
This column is no substitute for legal, tax or financial advice,
which can be furnished only by a qualified professional licensed in
your state. Copyright 2005 Clifford R. Ennico. Distributed by
Creators
Syndicate Inc.